VAT In Tamil Nadu

Thiruvananthapuram: The Tamil Nadu government will have to tinker with its sales tax rates, as it insists on remaining a non-Vat compliant state amidst Vat-compliant neighbours. Experts warn of the eruption of a grey trade from non-Vat rate states to other lower Vat rate states.

In a Vat-compliant neighbouring state there will be just two rates from April 1 (4% and 12.5%). In Tamil Nadu, there are at least 10 rates. Worst affected are likely to be FMCGs, taxed only 12.5% in Vat states. In Tamil Nadu, the rate on FMCGs is as high as 20%. Non-Vat compliant states will have to play around with these rates in a jiffy, say tax experts.

''In the short run, a parallel trade blizzard in Tamil Nadu and its border states is inevitable. And the worst shakedown is going to be to business ethics. Imaginative consultants will be able to spin a way out of the labyrinth, but still this new tax imbalance has all ingredients to force an strait-laced trader to resort to some amount of dishonest accounting practices to keep his business afloat,'' says Jose Sebastian, faculty, centre for taxation studies.

A goldmine in accounting advice business is also opening up for tax consultants across these states. The permutations of new problems are endless. A tax consultant pointed out to the possibility of growing trade competition between the two non-Vat compliant states, who also perhaps manufacture the same goods. For example, two textile-producing non-Vat states like Tamil Nadu and Gujarat could end up in a tax war on these commodities. ''Because of set-offs, Kerala trade will not be bruised by the differential trading next door. But the Tamil Nadu trade could be, unless the state government undertakes to compensate,'' says V Somasundaran, commissioner of commercial taxes, Kerala.

With the Centre firm that it will not compensate the non-Vat compliant states, Tamil Nadu government stands to be the ultimate loser.

In an another situation, Coimbatore’s present position as motor pump producing hub could be in jeopardy. Unless Tamil Nadu decides to sacrifice its revenue and give input credit for highly input-intensive manufacturing, such sectors could suffer a disadvantage relative to the manufacturers of these goods in Vat-compliant states, who gains through input credit.

Looking at the spread of goods taking differential taxes across the state borders, it is the manufacturers rather than common man who are going to be immediately hit. Average Kerala consumer is dependent on Tamil Nadu for food grains, groceries and vegetables. In both the states, these items come under minimum tax and cannot have much price implication.